Stock Analysis

Risks To Shareholder Returns Are Elevated At These Prices For Kumba Iron Ore Limited (JSE:KIO)

JSE:KIO
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Kumba Iron Ore Limited's (JSE:KIO) price-to-earnings (or "P/E") ratio of 15.1x might make it look like a strong sell right now compared to the market in South Africa, where around half of the companies have P/E ratios below 9x and even P/E's below 5x are quite common. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

Kumba Iron Ore hasn't been tracking well recently as its declining earnings compare poorly to other companies, which have seen some growth on average. It might be that many expect the dour earnings performance to recover substantially, which has kept the P/E from collapsing. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

See our latest analysis for Kumba Iron Ore

pe-multiple-vs-industry
JSE:KIO Price to Earnings Ratio vs Industry December 28th 2023
Keen to find out how analysts think Kumba Iron Ore's future stacks up against the industry? In that case, our free report is a great place to start.

How Is Kumba Iron Ore's Growth Trending?

There's an inherent assumption that a company should far outperform the market for P/E ratios like Kumba Iron Ore's to be considered reasonable.

Retrospectively, the last year delivered a frustrating 39% decrease to the company's bottom line. The last three years don't look nice either as the company has shrunk EPS by 11% in aggregate. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Looking ahead now, EPS is anticipated to climb by 7.3% per year during the coming three years according to the nine analysts following the company. With the market predicted to deliver 13% growth per year, the company is positioned for a weaker earnings result.

In light of this, it's alarming that Kumba Iron Ore's P/E sits above the majority of other companies. Apparently many investors in the company are way more bullish than analysts indicate and aren't willing to let go of their stock at any price. Only the boldest would assume these prices are sustainable as this level of earnings growth is likely to weigh heavily on the share price eventually.

The Bottom Line On Kumba Iron Ore's P/E

Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

Our examination of Kumba Iron Ore's analyst forecasts revealed that its inferior earnings outlook isn't impacting its high P/E anywhere near as much as we would have predicted. Right now we are increasingly uncomfortable with the high P/E as the predicted future earnings aren't likely to support such positive sentiment for long. Unless these conditions improve markedly, it's very challenging to accept these prices as being reasonable.

Don't forget that there may be other risks. For instance, we've identified 1 warning sign for Kumba Iron Ore that you should be aware of.

It's important to make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

Valuation is complex, but we're helping make it simple.

Find out whether Kumba Iron Ore is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.